In the Financial Advisory industry, the biggest insult that you can receive from one of your peers is to be accused of ‘churning’. Churning generally relates to insurance products, but in recent years, also applies to KiwiSaver.
The insult of being a ‘churner’ suggests that you are putting in place an insurance policy for your own income benefit with a total disregard for your clients interests.
Traditionally (before KiwiSaver) churning applies when you replace an existing insurance product with another insurance product and earn new commission for doing this.
Advice of Replacement Business Form
If your insurance policy has been churned (or Twisted) this simply means that you have a new policy and have completed a ‘Replacement of Business’ form. These forms are an ethical but not a legal requirement for the adviser to complete and explain to the client when they are replacing an existing policy.
The Replacement of business form requires the adviser and client to sign the form and outlines what the new policy and old policy are, what cover is being replaced and the reasons that it is being replaced. At Moneyworks we take these forms seriously and as AFA’s (Authorised Financial Advisers) we are not only ethically but legally required to put our advice in writing to our clients. This advice needs to explain why we are recommending the new insurance, and what risks you face.
Unfortunately, at present there are only 1800 AFA’s with that requirement in New Zealand. However, the Financial Advisers Act is currently undergoing a legislative review and initial indications are that these requirements will extend to most if not all people who will assist you with insurance in the future.
As a client, you need to ensure that your adviser goes through your Advice of Replacement Form with you before you sign it – and ensure that you understand why your old policy is not good enough to stay in place.
Why would I need to change my insurance policy and get a new one?
There is much discussion in the financial advice industry about what actually constitutes
churning. Each insurer creates their own insurance products based on their profitability model and some insurers choose not to update their products to keep up with the market. Other insurers continually revise their policy wording, and ‘pass back’ the new policy wording to old policies.
Does the replacement of ‘any product’ constitute churning (as assumed in the Melville Jessup Weaver report)? Or should churning only apply to replacement business where the client loses benefits, or to policies that are less than 7 years old?
Insurance policies can become quickly outdated, or too expensive, compared to other newer policies as follows:
Life insurance. There are minor differences in the additional benefits available to clients – the main difference is in price. If you have an old insurance policy, you may be paying far more for your cover than if you changed your cover to a a new policy.
Trauma insurance. There is a big difference between the quality of trauma insurance policies available. A policy that you took out in 2000 is likely to have far less conditions covered and very old definitions that have not kept up with medical science. It may not have ability to ‘buy back your life cover’ or ‘buy back your trauma cover’ after you have had a claim like modern policies do.
Most significantly most older trauma insurance policies do not have a ‘policy wording passback’. This is an important benefit that Moneyworks looks for on any new insurance recommendations that we make to our clients. This benefit generally means that as medicine advances, new criteria are added to the definitions, and these are then passed back to your policy. Generally, you can claim on the most advantageous criteria – your initial policy wording or the new policy wording.
What this means is that your policy will keep up with advances and shouldn’t need to be replaced in the future.
Our favourite (but not the cheapest) trauma insurance policy incorporates a total and permanent disablement benefit as a condition that you can claim on. Other insurers require you to pay extra for this cover.
There are also a big difference in the quality of trauma insurance policies with some covering only 5 limited definition conditions, with others being more comprehensive. Many financial advisers prefer to use the more comprehensive policies – which aren’t that much more expensive. In my experience, bank sold products have traditionally been more limited policies – however this could be changing.
Income Protection insurance. Like trauma insurance, definitions are regularly updated. The main difference between ‘old’ income protection insurance policies and ‘modern’ policies is that the old policies pay the benefit 4 weeks or 30 days AFTER your wait period is completed. New policies pay your benefit in advance. This is a significant benefit and needs to be taken into account when an adviser is reviewing your old policy.
On the other hand, many Moneyworks clients have a ‘level premium’ income protection insurance policy in place, which is a good product and cost effective. For many of our clients, this insurance policy remains in place even though we found that the associated life and trauma insurance cover were out of date and too expensive to retain.
When is churning bad?
When the client loses out on benefits, and is not informed about about what they are losing.
This can happen in many ways including:
- The clients health has changed since their original policy was put in place and they aren’t covered for all health conditions on the new policy. Sometimes the new exclusion or loading is negligible and the adviser and client will have an extensive discussion and decide that the risk is worth taking. The real issue is when this exclusion or loading is not properly canvassed between the adviser and the client.
- When there is a stand down period on the new policy where the client isn’t covered. Trauma insurance policies commonly have a 3 month stand down period before paying out on a new policy. Life insurance policies don’t pay out if the death is by suicide for the first 13 months. However, some insurers have ‘takeover terms’ which mean that the client is covered if they have had a policy in place already.
- Where there are benefits on the old policy that are not replicated on a new policy. As an example, many Moneyworks clients have an income protection insurance policy that has a ‘Specified Sickness Benefit’ as a core part of their policy. This means that if the client is diagnosed with one of the core conditions (cancer, heart attack, stroke) they will receive their benefit for 26 weeks (after their wait period) regardless of whether they earn an income or not. We are not aware of a new policy that has a similar valuable benefit – or if they do, it costs an extra premium. This is the kind of analysis the adviser needs to do when recommending a replacement of business.
- If a client has income protection and has recently changed occupation to ‘self employed’, it may be very difficult to claim on a new income protection policy, whereas the old policy would still cover them.
This also applies to getting a trauma policy with far less benefits, or more constricted definitions, limiting the ability to claim on the policy.
There are many ways that churning can be bad, but if there is a proper advice process, well documented and explained to the client, and the client ensures that they engage in the process and understand what is happening.
Earning a new commission from moving clients policies
At Moneyworks, we would prefer to receive ‘level commission’ from insurers in relation to our clients policies. However, when we move a clients policies for their benefit, we also want to give the client a discount on the premium where possible. Unfortunately, the way that commission structures are at present, we cannot do both, so have to take upfront commission to provide you with that discount.
Does bad churning actually happen?
Yes. There are advisers who do replace business without any consideration for the client and whether the client is losing benefits. We have met some of them – but from our experience these are a very small group of advisers. Sadly, new advisers and advisers with targets (on a salary or commission), including bank employee ‘advisers’, have a lot more pressure to ‘write business’ than established self employed advisers.
The advisers that we know and work with (and there are quite a lot of them) care about their clients, and put the clients interests first. We have had numerous instances where we have ‘tested’ the option of upgrading and moving clients insurance to new more modern policies, but the exclusions or loadings would not be in the clients interests.
One of the issues that promotes ‘bad churning’ is that the ‘renewal commission’ associated with insurance policies in New Zealand ‘stays with the original adviser’. This is an incentive for the clients ‘new adviser’ to move the insurance to a new company, so that they can service the clients needs.
Melville Jessup Weaver ‘Review of Life Insurance Advice’
This report was released on 23 November 2015 as an ‘independent’ report, commissions by the Financial Services Council of NZ (all the big insurers and banks are members). The findings of the report led to the resignation of pretty much all the insurer members and in our opinion this is not a robust research report. (See blog post 'No one is interested in your opinion').
There are several recommendations that that we do agree with (despite the flawed research methodology), one of the core ones being that renewal commissions on insurance policies should follow the client to the new adviser.
However, because of the flawed nature of the report, it is unlikely that their handful of good recommendations are likely to find traction.
That lack of an agreed definition of churning means that an accusation of being a churner will remain an insult in the financial advisory industry. However, there is ‘good’ replacement of business, where it benefits clients.
The ‘bad churners’ will remain, and it is important that the industry activities are monitored to try and drive the ‘bad churners’ out of the industry. However, sales targets that have to achieved to keep your job are a direct conflict to stopping bad churning.
As a client, the most important thing is that you ask your adviser to put their advice in writing and tell you what the risks are of this move at the same time as they are telling you the benefits.
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By Carey Church